Removing roadblocks to equitisation

Nguyen Viet Ha, managing director of the Hanoi Office at US-backed law firm BowerGroupAsia Inc.

Equitisation and divestment of state-owned enterprises (SOEs) has been considered extremely important for restructuring the Vietnamese economy, improving efficiency of the SOEs, and growing the capital and stock market.

There has already been a high political will for boosting the equitisation process in this country. A large number of resolutions, directives, decisions, and instructions have been issued by the prime minister in order to speed up the process. Nevertheless, SOE equitisation, as well as the divestment process, is still behind the schedule.

For instance, Decision No.26/2019/QD-TTg of the prime minister issued in August, regarding accelerating SOE equitisation and state capital divestment, provides a list of 128 SOEs which must be equitised between 2017 and 2019.

However, only 36 of them actually took place in this period. Similarly, the divestment process has also been slow. Under Decision No.1232/QD-TTg promulgated in August 2017 on approving the list of enterprises with state-owned capital to be divested in the 2017-2020 period, it was expected that VND60 trillion ($2.6 billion) would be divested. However, between 2017 and 2019, only VND4.7 trillion ($204.34 million) was divested, accounting for a mere 7.8 per cent of the targeted number.

The likely causes

The reasons for this are varied. The first is the lack of clear process with the authority to make decisions. The equitisation process is normally time-consuming with the involvement of various authorities at different levels, such as the SOE’s management executives, officials from various ministerial departments, and ministerial and government leadership.

The second cause is challenges in determination of the value of the SOEs. Since most of the SOEs have a diversified portfolio, including, for instance, real estate, it is challenging and complicated to determine their value. Many SOEs have low or even negative book value, but significant asset value, especially those who invest in real estate or have access to the land use rights of prime locations.

It is questionable as to whether those SOEs should be valued or priced based on the book value, actual asset value, or market price. Different evaluation methods bring different results.

The third cause is the lack of transparency. Most of the equitisation procedures were undertaken behind closed doors rather than being public and transparent. Potential investors are not given sufficient time and full access to all the information, data, and books of the companies to be equitised in order to correctly evaluate the opportunity before participating in the bids and thus becoming more confident in making the best possible offer.

The lack of transparency in combination with the lack of a clear process have created the ideal environment for incapable opportunist investors to corrupt the process in order to possess valuable assets at a cheap price.

The fourth cause is the restriction of foreign ownership limits in certain sectors, preventing potential capable investors from participating in the process. Most of the strategic investors seriously interested in bringing in finance, technology, and business know-how wish to acquire majority shares in the invested company. The cap of foreign ownership at 49 or 50 per cent would distract them from the process.

One final factor is weak corporate governance. There has been slow progress in corporate governance reform in general and in applying quality standards of book-keeping in particular, causing serious concerns from investors, especially strategic overseas ones.

Possible solutions

In order to speed up the process of SOE equitisation and capital divestment, it is strongly recommended that several actions be taken into consideration.

A clear process of equitisation with imposed responsibility for certain agencies to make decisions at certain stages of the process should be regulated. In addition, the methods to determine the value of the SOEs must be standardised, while giving the flexibility for them to apply the appropriate methods based on their actual value.

For instance, the value of the equitised or divested company and the offered price should be determined based on the actual value of the company instead of the stock market price. It is because the market price only represents a small number of shares or stocks which are traded, and is subject to various market factors.

Furthermore, the selling price should be determined independently by experts with international experience based on global practices. Information about the equitised companies should be also be public and transparent.

Besides that, there should also be funding into improving the corporate governance of SOEs before the equitisation or divestment process. Corporate books, records, and rules need to be reviewed and follow universal standards.